UK 2025 Budget Update: Another Divergence by HMRC From EU Law

On 26 November 2025, the UK Budget announced a significant clarification to the treatment of overseas establishments within UK VAT groups. This move marks yet another deliberate departure from EU VAT jurisprudence.

HMRC confirmed that overseas establishments and branches of UK VAT group members will continue to be treated as part of the UK VAT group, meaning that internal transactions between a UK head office and its foreign branch/establishment remain outside the scope of VAT. This preserves the traditional “single taxable person” principle for head office–branch relationships.

Importantly, this update explicitly rejects the EU’s position in the Skandia (C-7/13) ECJ case, which ruled that where a branch is part of a VAT group, then any services received from its head office (outside the VAT group) are treated as received by the VAT group (meaning that they are taxable). While EU Member States must continue to apply Skandia, the UK has chosen not to follow this line of reasoning.

A sharp contrast with Ireland’s recent announcement

The timing of the UK’s statement is particularly striking given that Irish Revenue announced proposed changes only weeks ago to narrow the scope of its VAT groups so that only Irish-established entities and branches can be included.

Ireland’s move is rooted in aligning more closely with the principles established in Skandia, reinforcing the idea that a branch in a VAT group can be treated as part of a separate taxable person from its head office for VAT purposes.

This creates a clear and unusual contrast between two jurisdictions whose VAT systems historically aligned closely.

For multinational groups operating across the UK and the EU, this development contributes to the growing divergence between the two VAT systems. Businesses should monitor these differences closely, especially where internal recharges, cross-border branch structures, or VAT group membership are involved.

If your business operates across multiple jurisdictions, or if you’re unsure how these changes might affect your VAT position, get in touch for a tailored review of your structure. Our consultants can help you assess any potential risks, identify opportunities, and ensure your group remains fully compliant in both the UK and EU.